Big problems with tiny, often improvised units
We applaud the removal of barriers to erecting new ADUs, but our main concern is the tens of thousands of rental relationships that already exist in illegal units that can come back to bite the owner.
The California Department of Housing and Community Development (HCD) publishes annual guidance and FAQs on Accessory Dwelling Units (ADUs) regulations. Its updated 2025 ADU Handbook is off the press and you can download it here.
These secondary homes on a property can be used for family and friends or rented out for secondary income, but are subject to a myriad of rules. The handbook reflects a number of legislative changes taking effect on January 1, 2025, aiming to address the state’s housing shortage by streamlining the construction of pint-sized units and expanding opportunities for property owners.
Although lawmakers have paved the way for new ADU construction, it seems that not so many homeowners have availed the opportunity to build them. It hasn’t lived up to the hype. While it was predicted that new ADUs would sprout up by the thousands and put a dent in California’s chronic housing shortage, this premonition hasn’t come to pass thus far. Another issue we've encountered in rent-controlled jurisdictions is that unsuspecting owners contemplating the addition of an ADU may be taking away services from existing tenants who can in turn petition a rent board for a reduction of rate. When a laundry room or storage space, for example, is gutted out to make way for the new living quarters.
So let’s pivot to the tens of thousands of owners who are renting out units that are not in compliance with local building codes. We’ll call these “unwarranted units,” and these tiny living quarters can create colossal liability for owners and the buyers who inherit them.
The fundamental question: Is there a Certificate of Occupancy?
Many unwarranted units are plagued with building code issues, but others are habitable, if not in pristine condition. Yet the condition of the unit does not matter. We’ll need to ascertain whether it is in good graces with the city, and sometimes our office gets into what we call a linguistic tussle with the owner.
For example, the owner of a three-story house might say that all three floors are legal, but the bottom floor has been converted into a separate unit without obtaining a permit to put in a gas stove or kitchenette. It’s not legally permitted to be rented out as a segregated space.
Caveat Emptor (Buyer Beware) - Pay attention to disclosure requirements
We are encouraged that lawmakers have put away the scalpel and taken a machete to ADU regulations, but with the emergence of the ADU industry comes misleading information being disseminated in terms of whether a buyer is purchasing a property with an ADU.
In fact, the rental unit may be illegal to the extent that it does not comply with local or state housing, zoning, or building codes. Often lacking necessary permits or failing to meet health and safety standards. Examples include converted garages, basement apartments, or unpermitted additions that are not registered or approved by a local jurisdiction.
It’s not uncommon that properties are mischaracterized. For example, the MLS may state that the property “has an ADU downstairs,” but there is no separate Certificate of Occupancy for what has been improperly advertised as an ADU. If that separate living unit is an unpermitted space, it should not be called an ADU. Rather, the unit should be branded as an in-law that doesn’t have permits or doesn’t have the necessary right to rent.
Another example we’ve come across is when a listing is advertised as a “single-family home with an extra unit.” It is relatively easy to ascertain whether this extra unit is permitted. In San Francisco, for example, an R-3 report can reveal the status of this mysterious space.
Legalizing an unwarranted unit
Owners can certainly “turn themselves in” by alerting their local government to the existence of an unwarranted unit and then take steps to bring it up to code, but this can be a herculean task with an added expense when noise and construction render the unit uninhabitable. If the tenant needs to be displaced as modifications are being made, they are entitled to relocation payments.
A properly prepared and enforceable tenant surrender of possession agreement is a viable option to escort the tenant out of the unwarranted unit. Also known as a tenant buyout agreement, it is more than “cash for keys.”
The outgoing tenant not only agrees to vacate the premises voluntarily but importantly, also agrees not to sue their landlord for any claims that arise from the tenancy, including those claims the tenant may not know about. The goal is to remove any residue and prevent litigation.
For example, the tenant may vacate and discover six months later that they developed a respiratory infection from a mold infestation. Our office is well-versed in drafting these agreements and familiar with the many nuances in certain jurisdictions like San Francisco, Oakland, Berkeley, and Richmond.
Keep in mind the long time frame of legalizing an unwarranted unit. Granted, there is a public policy that encourages the production and streamlining of ADUs and gives amnesty to landlords seeking to make unwarranted units compliant, but it can still be an elongated process. We can’t just press a button to legalize a rogue unit.
RELATED: Owners of illegal units in Berkeley can seek amnesty under a four-year pilot program »
How tolerant are owners of the risks attendant to renting out an unwarranted unit?
Many of our clients renting out a shadowy unit are perfectly content renting out unpermitted units. They get steady cash flow and co-exist nicely with their tenants. They are perfectly fine maintaining the status quo. But what happens when there is acrimony in the rental relationship?
What we’ve found is that when renting out an unpermitted unit, everything that is going well is great, but when it becomes bad - when there is acrimony between the landlord and the tenant - it is awful. So what housing providers need to understand is that renting out these clandestine living spaces can come back to haunt the owner when there are grievances. A landlord who has accepted rent for years may be happy, only to find that this income is disgorged when the tenant squawks to a Rent Board or building inspector and the whole ball game begins.
We know that California property owners are facing an insurance crisis and so to add insult to injury, insurance companies may not cover the claims that arise. We urge transparency with your insurance provider and let them know that there is an additional living quarters on the parcel. We’ll need to identify that separate dwelling in the event the owner is subject to liability.
Decisions to make when a single-family home is chopped up into segregated spaces like a pie
Ideally, we can legalize the living space but it’s not a perfect world we live in.
Does the property owner or a potential buyer eyeing a purchase keep the status quo and continue accepting rent from the tenant while risking future liability? Do they transition tenants out with a voluntary vacancy in exchange for compensation, fixing up the unit, and putting the tenant back in? Or if it is impractical to legalize the unit, is it prudent to restore a single-family home to its original status and get rid of the unwarranted unit?
These are weighty decisions best journeyed with proper counsel.